Predict the actions the IASB Essay

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1001-04
30 December 2016

Predict the actions the IASB

At the height of the meltdown, the International Accounting Standards Board (IASB) has taken several actions to address issues related to the credit crisis. Foremost is the Board’s reaffirmation of its commitment to maintain transparency for investors and other users of financial statements, along with the recognition for the need to clarify and/or revamp existing standards to make them more efficient and responsive to current developments.

As preliminary steps to achieving this, the Board in September organized round-table discussions and panel meetings among experts to draft reports and amendment proposals in an attempt to make them more adaptable to developments. Working on double time to catch up with the crisis, proposals to improve financial instruments disclosures and amendments to permit the reclassification of certain financial instruments were raised in October, along with the creation of an advisory group to review reporting issues related to the credit crisis.

As well, an additional board meeting took place to discuss amendments to IFRS 7 and Disclosures. And to cover all corners, IASB, working hand in hand with the Financial Accounting Standards Board (FASB), committed to a global approach to enhance market confidence. A global approach means being in close collaboration with markets around the globe. Thus, it is safe to predict that a panel or advisory board composed of representatives from the different markets. With this kind of a panel or advisory board, there is a tendency for markets to be more cohesive, perhaps cooperative.

More importantly, a more vigilant attitude towards inconsistencies would surface. Inconsistencies, especially in fair value measurements, have been the blamed to have contributed to make the credit crisis worse. In the next few years, amendments in the FAS 157 Fair Value Measurements could be the focus of IASB. To this end, a clarification has already been made by the Office of the Chief Accountant of the US Securities and Exchange Commission (SEC) and the staff of the Financial Accounting Standards Board (FASB).

The clarification, while not an amendment as yet, provides guidance for determining fair value in inactive markets. But considering there is no market to speak of, an amendment may be in the works if investors, and the IASB, which has vowed to continue to ensure consistency, realize that the guidance is not effective in the current situation. More effective measures would have to drafted, and these would have to be internationally viable, thus, approval from the advisory board composed of international experts would be in order. That the Board is considering IAS 39 is a major indication of things to come.

IAS 39 establishes principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items, with the condition that the entity has become a party to the contractual provisions of the instrument, and shall remove a financial liability, or part of it, from its balance sheet only when it is extinguished. IASB has taken steps to immediately assess inconsistencies in the Standard. In concurrence with its commitment to transparency, IASB will check and strengthen its standards to produce better disclosures about valuations.

As it has already committed itself to work closely with FASB, as stated in their joint discussion paper, Reducing Complexity in Reporting Financial Instruments, the two boards will work together to “develop with solutions at providing greater transparency and reduced complexity in the accounting of financial instruments. Moreover, breaking out from its exclusive, almost elitist ways, IASB will reconsider the existing structure of the Board to ensure that it is still effective and appropriate under the current situation.

One major step is opening its doors to ideas from outside the Board, making it in a way more democratic. Already, the Board has expressed willingness to participate in studies on the impact of accounting in the credit crisis. It has as well organized public roundtables in Europe, Asia and America, with the purpose of “gathering input on reporting issues emanating from the current global financial crisis. This would include responses by governments, regulators, investors and others. Other specific steps that the IASB is considering, and has actually committed to take include:

1. Consideration of the possible impact of the US Emergency Economic Stabilization Act of 2008 and other similar programmes internationally on the valuation of assets and liabilities. This means that the IASB will work closely with the FASB to develop common approach to issues related to the valuation of financial assets and liabilities resulting from purchases made through the US Emergency Economic Stabilization Act of 2008 and any other similar programs internationally, if and when these programs are initiated. 2.

Immediate consideration of the ability to reclassify financial instruments. The IASB will assess any inconsistencies in how IAS 39 and US GAAP practice address the issue of reclassifications and whether to eliminate differences. This is in response to IASB observation that US GAAP permits entities to reclassify financial instruments that are in the form of securities from their trading portfolio to “held to maturity. ” At the same time, IASB noted that US GAAP permits some loans that are not securities to be transferred from Held for Sale to Held for Investment.

These activities will have to be overlooked closely by the IASB to eliminate inconsistencies and fulfill its commitment of transparency. ? Question 2. What actions should the IASB take during the next five years in response to the current financial crisis giving reasons to support your recommendations? (40 Marks) The current financial crisis is the result of the careless decisions and erroneous policies that governments and key financial groups made in the past.

One of these policies that some people are pointing to is a certain accounting rule, which may not necessarily have caused the crisis but has been a big help in making things a lot worse. The accounting rule, devised by the Financial Accounting Standards Board (FASB) and named FAS 157, establishes “a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. It states that companies have to “mark-to-market,” or simply put, laying a market price on any asset that you could get if you traded it on an open market.

The problem is that “any asset” does not only refer to stock but also involves a Credit Default Swap, which is “a derivative, in this case a complicated insurance-like contract that promises to cover losses on a security in the event of a default. ” To further complicate things, the market in which they trade is unregulated, making it free for all to move from investor to investor without anyone overseeing the trades to ensure that the buyer has sufficient resources to cover any security defaults.

By the third quarter of 2007, according to the Comptroller of the Currency, top commercial banks held over $13 trillion in credit default swaps, and the write-downs, as observed by critics, have caused capital shortages in financial institutions that are not related to any actual losses. If this is so, it is critical that the IASB, together with the FASB, review FAS 157 and/or any other unnecessary mark-to-market rule.

Mark-to-market may be important in the environment of transparency, as SEC contends, but if it has proved, as it did, to have caused shortages in capital among financial institutions that are not related to actual losses, new rules and new standards are in order. Afterall, as Steve Forbes points out, “How can you mark to market something when there’s no longer any market? ” To this end, in the midst of calls to suspend the mark-to-market accounting, the IASB has admitted to taking this issue into account and has proposed to come up with, not so much as an amendment, but a guidance on the application of fair value measurement.

In connection, IASB needs to push through with its plan to “introduce a separation between an entity’s financing activities ad its business activities. Currently, users of financial statements have expressed dissatisfaction over the present standard in which different statements and dissimilar items are aggregated in one number. As a result, inconsistency in the presentation formats have caused difficulties for users “who want to understand and analyze and entity’s activities.

” A lack of aggregation of information on product costs, materials and labor, general and administrative costs makes it difficult for users to study the relationship between revenue and costs and analyze an entity’s activities. Issues such as this calls for a need for clear presentation of financial information, one that needs the attention of the IASB. David Tweedie, IASB chairman, asserts that to address this, and other issues relating to the credit crisis, involves winning back the confidence of investors.

“It is only when confidence begins to return that credit markets will return to some sense of normality. ” As such, he advocates transparency and disclosure to ease the investor qualms, to which IASB could offer much support by identifying solutions to the challenges and responding to issues, which in turn would help bring back confidence in. Confidence, in this case, is easier won with transparency and open book policy, which in turn gives more value to open and accurate financial reporting.

Providing investors with the most transparent, consistent financial reporting possible has never been more critical to the efficiency and soundness of capital markets. Thus, a high quality global standard for financial statement presentation, should be priority of IASB as well. ? Question 3. Australia has an infrastructure shortage. Has the short-term focus of accounting contributed to this? Give reasons to support your answer. (40 Marks) In Australia, the declining infrastructure spending has triggered arguments among many commentators and interest groups.

To illustrate, in 1969, eight percent of Australian GDP went on infrastructure. This had fallen to 7. 2 per cent in 1975; 5. 5. per cent in 1989, and 3. 6 per cent in 2004. Across the states, decline in infrastructure spending is similarly evident. In New South Wales, the public transport crisis has been blamed on low state infrastructure spending. In Queensland, a Gross State Product fall from 5. 4 per cent in 2000 to 4. 2 per cent in 2003. Commissioned reports by the Queensland government have also highlighted inadequate spending refurbishing energy infrastructure.

One group insist that the problem was intensified by the government’s policy to “run balanced budgets, to accrue surpluses and meet the demands of external credit rating agencies than the real needs of their respective communities. Others suggest that the problem, especially for the public sector, is in priority setting more than the amount being spent on infrastructure. Indeed, in the 2007 budget, the Federal Government pledged $22. 3 billion towards infrastructure. An encouraging prospect, only if the allocation is effectively managed.

Perhaps one of the biggest challenges in the Australian market is the lack of coordination between both State and federal governments. This lack of coordination has resulted to long-term plans, in turn resulting to a lack of guarantee for a long term pipe line of large projects that should attract overseas investors. On the other hand, the shortage of labor materials in Australia’s domestic market has seen the capital cost of infrastructure projects increase significantly. This places further budgetary pressure on government funding.

Bereft of challenge from the government, however, has not stopped competitions and opportunities in infrastructure for international investor, but this is mainly because “there are more mega-deals in the billion dollar range. ” Thus, a wave of private sector capital targeting public infrastructure. A Privately Financed Project (PFP) is a “contractual arrangement under which the Government grants a concession to the private sector to supply and operate economic or social infrastructure that would traditionally have been acquired and operated by the public sector.

” Examples of these are toll roads, railway stations, hospitals, and car parks. Under a PFP, a public sector entity (the purchaser) arranges for a private sector entity (the operator) to provide the infrastructure and associated services for an agreed period (the concession period). As stated in the Policy and Guidelines Paper prepared by the Office of Financial Management, it is integral to most PFPs that the private sector operator designs, finances, builds and operates the infrastructure needed to provide the contracted service for the concession period.

PFPs typically include both a capital component and a continuing service delivery component, and are generally complex and involve high capital costs, lengthy contract periods that create long-term obligations, and a sharing of risks between private and public sectors2. Unfortunately, accounting for PFPs has not been specifically dealt with in Australian accounting standards, which only goes to show the amount of priority is being given to infrastructure. As commentator Alan Wood summed up the issue in 2004, “the lack of cost-benefit analysis means a significant amount of the money spent on infrastructure has been wasted….

But establishing whether there is in fact a critical shortage of national infrastructure is impossible to achieve with any degree of accuracy. ” A recent statement by Future Fund head David Murray, however, tells all. He says the financial crisis means the Government will not have the money it wants to set up three new infrastructure funds. The Government wants to create a $20 billion ‘Building Australia’ fund, an $11b education investment fund, and put $10b into a health and hospitals fund.

Some of the money was to come from this year’s budget surplus and some from next year’s. In addressing any infrastructure shortage, there is a need to boost the economy’s productive capacity. Efficient investment in new capacity and an optimal utilization of existing capacity are in order. Of course, well-functioning markets with effective price signals is necessary to support the former. Together, these factors provide a conceptual framework for assessing the appropriate role of government in improving outcomes in infrastructure market. ?